Fed to wind down historic program used to rescue economy

Chelsea West
September 23, 2017

Yet even though the $10 billion a month in maturing debt that the Fed initially plans to let run off from its balance sheet amounts to a mere trickle, the bond market may still throw another fit - a sequel to the 2013 taper tantrum, when then-Federal Reserve Chairman Ben Bernanke signaled that the Fed was likely to slow its asset purchases later in the year.

Policy makers left the benchmark interest rate unchanged in a range of 1% to 1.25%. Some economists say they think the figure could end up around US$2.5 trillion, still far above the US$900 billion the Fed held in its portfolio in pre-crisis days.

Hints of whether the Fed will likely raise rates in December for a third time this year could come from its revised "dot plot, " in which individual Fed officials anonymously post their expectations for future rate hikes.

"This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and worldwide developments".

In a news conference after the policy decision, Yellen acknowledged the inflation shortfall had proved more persistent and inexplicable but said the Fed was cognizant of the risk of raising rates too slowly and letting the economy overheat or too quickly and pushing it into recession.

In July, the core personal consumption expenditure (PCE) index, Fed's favor inflation indicator, rose only 1.4 percent year on year, below Fed's two percent target and also lower than the 1.9 percent in January.

In response, futures traders raised the odds of a December rate hike to 72 percent from 52 percent earlier in the day, while a Reuters poll found that Wall Street's top banks also backed that timeline. No one is quite sure how the financial markets will respond over time. In fact, Yellen acknowledged that the Fed didn't fully understand the reasons for low inflation. After that, the monthly reductions will remain steady.

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The Fed views a modest level of inflation as helping to propel consumer spending and business investment.

The U.S. Federal Reserve will begin shrinking the enormous portfolio of bonds that it amassed after the 2008 financial crisis to try to sustain a frail economy.

Now, with a much stronger economy, Fed officials are expected to announce a starting date to begin allowing the bond holdings to shrink gradually. While the unemployment level remained relatively stable at 4.4% in August, inflation has remained below the 2% target.

Central bankers have been in a bind over when to lift rates again.

Policymakers have signalled their plans for the Fed balance sheet for months in an effort to avoid rattling markets.

YELLEN: The decisions that we've made this year about rates and today about our balance sheet are ones we have taken because we feel the USA economy is performing well. "However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data".

US bond yields rose, pushing up the USA dollar after the Fed's decision, but USA benchmark stock indexes were little changed. They continued to forecast one more interest-rate hike later this year, saying storm damage will have only a temporary impact on the economy.

Other reports by TheSundaySentinel

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